U.S. sues Wells Fargo over FHA-insured loan defaults

The U.S. government has sued Wells Fargo in a New York court, accusing America’s largest mortgage lender of misrepresenting the quality of thousands of loans in order to be eligible for federal loan insurance.

The lawsuit, filed Tuesday in federal court in Manhattan, seeks to recover “hundreds of millions of dollars” that the Federal Housing Administration (FHA) paid out after borrowers defaulted on Wells Fargo mortgage loans.

The bank had applied for FHA insurance for the loans, meaning that if the loans went bad, the bank could ask the government to pay for costs associated with the defaulted mortgages. The lawsuit charges that Wells Fargo falsely certified that some loans were eligible for government insurance when they actually weren’t.

Specifically, the lawsuit alleges that between May 2001 and October 2005, Wells Fargo & Co. certified that over 100,000 mortgage loans were eligible for the insurance. But “a very substantial percentage of those loans – nearly half in certain months” were not eligible, according to the lawsuit.

Wells Fargo denied the allegations and promised a vigorous defense in a statement Tuesday. Many of the issues raised by the lawsuit, it said, have already been addressed with the Department of Housing and Urban Development (HUD). The bank also pointed out that it has already disclosed the issues in its latest quarterly report.

“Wells Fargo is proud of its long involvement in the FHA program, which has helped so many people obtain affordable mortgages and become homeowners,” the bank said in a statement.

U.S. Attorney Preet Bharara, who announced the lawsuit along with HUD officials, sought to portray the bank as driven by quantity instead of quality. Bharara said that Wells Fargo rewarded employees based on the number of loans they approved, a practice he called “an accelerant to a fire already burning.”

This marks the fifth lawsuit that the government has brought against major lenders over mortgage practices.

Wells Fargo, based in San Francisco, is the country’s fourth-biggest bank by assets and its biggest mortgage lender. Shares fell 70 cents, or 2 percent, to finish at $35.10.
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